Establishing a private foundation is an exciting decision, but it’s one of many that funders will face throughout their foundation’s lifecycle. They will need to lean on experts to guide them throughout their philanthropic journey, which presents advisory professionals with the perfect opportunity to connect with their high-net-worth clients. These popular giving vehicles can be an “estate plan in action,” helping provide a mechanism for families to cement their goals, collaborate to effect change and strengthen their legacy. To learn more, we asked our Chief Legal Officer Jeffrey Haskell to share the many considerations funders must navigate at different junctures. Here are five crucial decisions and key takeaways from a recent Foundation Source webinar.
Decision #1: What will the foundation’s legal structure and purpose be?
The key decision for any new foundation revolves around its legal structure. Foundations face the all-important choice between adopting a trust or a corporate structure and each one comes with its own set of pluses and minuses:
- Trusts: adhere to stringent fiduciary standards, operate under complex rules and regulations.
- Corporations: enjoy a high level of flexibility, but they may be subject to a higher tax rate, particularly regarding unrelated business taxable income (UBTI).
Decision #2: How will the foundation be funded?
Board members are responsible for making sure that investments are prudent. They must carefully review prospective investments beforehand and regularly review the foundation’s investment portfolio to see if adjustments must be made. Because foundations have a 5% required payout minimum, board members should be on the lookout for investments that will produce enough return to meet that minimum. Relying solely on investments might not cover these operational expenses if the bulk of investments are in non- or low-income producing illiquid investments. To have an accurate accounting of how much the 5% annual payout requirement is, foundations will need to obtain detailed annual valuations if they hold assets beyond cash and publicly traded securities.
Decision #3: How will the foundation avoid self-dealing and other violations?
Strict regulations govern foundations around self-dealing, which generally prohibit transactions between a foundation and its insiders. Any self-dealing penalties must be paid by the self-dealer, not the foundation. When it comes to corporate foundations, there must be clear distinctions between corporate employees’ roles and foundation activities. These lines can be blurred because corporate employees sometimes wear two hats when foundations are run by existing employees of the corporate parent. Therefore, it’s important to be clear about which capacity they’re active in and when. Self-dealing rules can be complicated. Even seemingly beneficial transactions can still be considered self-dealing if they are between insiders and the foundation. For example, a foundation paying rent to a corporate parent, even if it’s below market value, would still be considered self-dealing.
Want to see the rest of the key takeaways?
Check out the Key Takeaways and full Q&A resources.
Learn More About How We Support Advisors
Schedule a call or reach us at 800-839-0054 to learn how we can best support your clients who are passionate about philanthropy. Together, let’s #begiving.
